Impact of Fee Disclosure on 403(b)s

November 30, 2010 (PLANSPONSOR (b)lines) – New fee disclosure rules from the U.S. Department of Labor (DoL) present unique challenges to 403(b) plans.

In a Webinar, part of The Standard’s Build Your Business Webinar series, Bob Toth, Principal at the Robert J. Toth, Jr. Law Offices, reminded attendees that the DoL has completed its three pronged approach to fee disclosure: 408(b)(2) service provider disclosure of fees to responsible 403b fiduciary in order to be reasonable compensation; 404(a) fiduciary requirement disclosure to plan participants; and Schedule C of Form 5500 disclosure of fees paid to providers. He noted that only ERISA-governed 403(b)s are subject to the rules.  

Toth said the DoL’s FAB 2010-01 and 2009-02 discussing when a 403(b) contract will be included in plan does not apply to 408(b)(2) regulations. The fee disclosure rules apply to old contracts even though they are excluded from Form 5500 Schedule C reporting. Vendors of “lost” 403(b) contracts will have to disclose fees or they cannot receive compensation as it will be considered a prohibited transaction.  

In addition, a plan sponsor with former participants in old accounts has an obligation to make fee disclosures to those participants.  

Because of this, Toth says, the question of whether a plan falls under the ERISA safe harbor becomes more important than ever.  

Under 408(b)(2), a covered service provider (CSP) must disclose compensation received by the CSP or its affiliate. Toth says this has the practical effect of “flushing” of contracts, that is, vendors who have these contracts that sponsors formerly couldn’t get information on will have to reach out to sponsors to make disclosures. Toth advises sponsors to grab onto that information to have a more complete Form 5500 and audit next year. He also notes that it will strengthen the sponsor’s position with the auditor as to what assets are in the plan.  

For mutual funds, Toth says the CSP is not the mutual fund company but the custodial account for 403(b)s, and a 403(b) registered representative is not a CSP but is technically a subcontractor for the CSP, so reps do not have to disclose; however, the custodian has to disclose what is paid to the registered representatives. The challenge is the custodian for 403(b) plans usually offer all of the funds of the mutual fund complex, and fees will have to be disclosed for each fund, according to Toth.  

Many 403(b) contracts consist of annuity contracts, which present a challenge because they are typically in a general account. Toth says the CSP for an annuity is the insurance company, and the fees are likely to be the mortality and expense charge, but it needs to be described. 

Toth says insurance companies and custodial accounts can make these disclosures via regular prospectuses unless the fund provider is related to the insurance company or custodial account provider. 

The 403(b) sponsor must review all compensation because vendors will need a determination by clients that fees are reasonable. Toth says reliance on a plan adviser will be important.  

For participant disclosures, 403(b) sponsors will need to rely on 408(b)(2) disclosures by vendors to figure out for what contracts they will need to report fees to participants, even old contracts and even former participants, Toth notes. Sponsors must disclose to participants plan-related information and investment-related information such as circumstances under which elections can be made, limitations on transfers (exchanges), voting rights, and investment alternatives under the plan.  

Sponsors must work with vendors to make sure administrative expenses are disclosed.  

For investment information, much of the requirements can be satisfied by a prospectus.The more difficult thing, according to Toth, is the required statement to participants of how fees affect accounts, glossary of terms, and invitation to DoL Web site. The question is, who is going to do this? Toth says no one right now is assigned the responsibility for this and many plan sponsors aren’t set up to provide this. This is another area in which an adviser can offer value.  

To watch the presentation, go to, click on Upcoming Webinars, and Watch Past Presentations.